BUENOS AIRES (S&P Global Ratings) April 20, 2017--S&P Global Ratings said today that it revised its outlook on its global-scale rating on Vale S.A. to positive from stable. We also affirmed our 'BBB-' global-scale corporate credit and issue-level ratings on bonds issued through Vale Canada Ltd., Vale Overseas Ltd., and PT Vale Indonesia Tbk. At the same time, we affirmed our 'brAAA' Brazilian national-scale rating on Vale. The outlook on the national-scale credit rating remains stable.

Vale's credit quality is improving rapidly due mainly to supportive iron ore prices and management actions to contain the company's leverage, such as non-core asset divestitures and operating cost reductions. We still expect iron ore prices to dip slightly this year, but given their very strong levels during the past six months, we believe Vale could reduce its adjusted debt by $8 billion-$10 billion by the end of 2017. Such a drop would represent 20%-25% of adjusted debt as of Dec. 31, 2016.

In our view, a markedly lower debt position could pave the way to an upgrade because it would reduce vulnerability to price downturns, compensating for the inherent volatility of Vale's cash flows. In the longer term, as Vale's operating cash flows would grow stronger due to increasing volumes from Carajás pit and lower capital expenditures, we expect annual discretionary cash flows of at least $4 billion, which the company would use to reduce its debt further.

Vale's portfolio is more concentrated in iron ore than those of other big miners, exacerbating volatility patterns of profits and cash flows in the past two years as iron ore prices fluctuated. That's the main reason why we assess its business risk profile as satisfactory, as opposed to other big and low-cost producers such as Rio Tinto PLC (A-/Positive/A-1), BHP Billiton Ltd (A/Stable/A-1), or Glencore PLC (BBB/Positive/A-2). Still, Vale's massive scale, stellar mining portfolio, and top-performing cash cost profile support its business risk profile.

We expect the company's FFO to debt to range between 35% and 40% and adjusted debt to EBITDA at around 2x in 2017 and 2018.

Our main assumptions include:Iron ore prices of $60 per ton for the rest of 2017 and $50 per ton in 2018 (62% iron ore content delivered in China);Total cash costs (C1 costs, SG&A, freight and royalties) at $32 per ton in 2017 and $28 per ton in 2018 due to volumes from S11D project in Carajás mine;Iron ore volumes (including pellets, own production only) of 370 million tons in 2017 and 415 million tons in 2018 (average content of 63.5%);Average exchange rates of R$3.25 per $1.00 in 2017 and R$3.30 per $1.00 in 2018;Annual pellet production of 53 million tons in 2017 and 55 million tons in 2018;Copper prices of $5,500 per ton in 2017 and 2018;Asset disposals of $3 billion in 2017 (including the partial repayment of the loans that Vale had granted to the Nacala Corridor in Mozambique and the cash portion coming from the sale of the fertilizer business for $1.25 billion);Capital expenditures of $4.5 billion in 2017 and $4.0 billion in 2018; andDividend payments of $1.5 billion in 2017 and $1.0 billion in 2018.

Our adjusted debt estimates include the unamortized portion of the three gold stream transactions on the Salobo mine, derivatives liabilities that are intended to hedge currency and interest-rate risks on debt totaling $1.1 billion, 50% of the amount stemming from the remediation agreement following accident at Samarco's dam for $1.5 billion, and $5 billion on a tax liability (REFIS).

We stress the company under a hypothetical Brazilian sovereign default scenario, in which we believe the company would have sufficient cash flow generation to cover its obligations and would maintain liquidity sources over uses of more than 1x for a one year of simulated stress scenario.

Vale's rating upside remains limited to one notch above Brazil's T&C assessment, which is currently at 'BBB-'.

Therefore, we expect Vale to serve its foreign-currency debts even in a scenario of severe currency controls in Brazil. The positive outlook on Vale reflects the increased likelihood for an upgrade within the next 12-18 months, given that output from the S11D projects is increasing and the company is maximizing economies of scale.

We could raise the ratings if the company's FFO to debt approaches 40% while debt-to-EBITDA stays in the 2.0x-2.5x range under our current price assumptions for iron ore.

That would also require Vale to reduce nominal debt meaningfully in order to increase its resiliency to price downturns.

Under any circumstances, the ratings on Vale will remain capped at one notch above Brazil's T&C assessment. According to our calculations, a $5 dollar change in iron ore prices would cause a $2 billion variation to our base-case adjusted EBITDA.

Because we expect discretionary cash flows of at least $4 billion and the downside risk to our price assumptions might be rather limited—given that supply would likely shrink at less than $50 per ton--we believe downside risks for the ratings are limited.

Nevertheless, we may revise the outlook to stable if market conditions don't allow Vale to reduce nominal debt, so its credit metrics would remain more vulnerable to price downturns. Credit metrics in line with the current rating category would be FFO-to-debt of 25%-30% and debt to EBITDA of 2